Study: Mortgage ‘Mods’ Help Borrowers – With Other Loans

Last week, the Journal’s Jon Hilsenrath wrote about “an economic divide that separates Americans not by income or wealth but by their access to credit.” Because of the housing crash that marred the credit records of millions of homeowners who missed mortgage payments, many Americans are unable to take advantage of low interest rates and the dirt-cheap money being lent by banks as a way of jump-starting the economy.

A study released recently by credit-rating agency TransUnion helps explain the situation. According to TransUnion, borrowers who received mortgage modifications after missing payments are more reliable borrowers in the future — for all types of loans, including credit cards and auto loans — than those who did not receive modification. Modifications can involve reducing interest rates, extending the term of a loan, waiving fees and, more rarely, writing down the principal balance of a loan.

TransUnion looked at 5 million mortgages originated before 2008 to borrowers who later fell behind by 120 days or more and received a modification. Borrowers who then took out a new credit card fell behind on their credit-card payments 13.6% of the time. In comparison, homeowners who did not receive a modification fell behind 17.1% of the time on new credit cards.

This might sound like a great argument for more widespread mortgage modifications, a topic that has been kicking around Washington for the last few years. But the TransUnion report also highlights a hard truth of the post-mortgage crash economy: About six in 10 borrowers who have received a modification were delinquent once again in the 18 months following the modification. In other words, for the majority of borrowers who got into a jam on their home loans and received help, mortgage modifications were an exercise in futility.

The main takeaway of the report, says Steve Chaouki, a vice president with TransUnion, is that the act of getting a modification “signals that borrowers are trying to make themselves better.” Lenders should look at borrowers with a mortgage modification on their credit histories as better credit risks that those who just have a delinquency.

“Getting a mod is not necessarily the easiest thing to do, so it says a lot about the consumer’s thinking. If you spend the effort to get a mod, it means you see a path out of your financial situation,” Mr. Chaouki says. “It’s almost like an affirmation of their desire to improve themselves.”

Of course, this is to be expected in the midst of a prolonged economic downturn with sluggish job growth. But it’s troubling because mortgage modifications have been pitched by some people as an economic stimulus that will provide more spending money for down-and-out homeowners. If those same homeowners need another bailout just 18 months later, that hardly seems like a lasting improvement on the situation.

According to TransUnion, the states with the worst rates of credit recidivism – or falling into delinquency after a modification – are Delaware (67.5%), Rhode Island (66.3%), Maine (64.3%), Florida (64.4%) and Texas (64.2%).